How savvy pensioners can get a 40% pay increase

Moving into retirement is daunting for most people, even those who seem to be well funded. There is an instinctive fear of consuming capital and running out of money one day. Retirees, therefore, tend to be on constant lookout for ways to cut back on their expenses.

Few of them realise, though, that the cost of their living annuity is likely to be their single biggest expense in retirement, and that switching to a low-cost provider could greatly improve their financial position without detracting one bit from their lifestyle

As many as 80% of retirees choose to put their pension savings into a living annuity, rather than a guaranteed annuity simply because it leaves them in control of their money. They decide how much income they draw every year (within regulatory limits), how their money is invested, and who inherits the balance after they die. A guaranteed annuity does not come with any such options.

There is another important control aspect that tends to be overlooked: as a living annuity holder, you can also change your service provider. You can move your living annuity from one company to another without restriction or penalty in most cases. Again, this is not possible with a guaranteed annuity. With a guaranteed annuity, once you have paid over your money to the insurance company you are stuck with them for life.

Given that you’re already in control of your investments and your income the ability to move your savings may seem redundant. But there is one aspect you have little say over: the fees that your current service provider charges. So if you are paying excessive fees (more than 1% pa in total), being able to switch to a lower cost provider is a very valuable benefit.

Few living annuity holders, and indeed few advisors, appreciate that their savings are depleted not only by drawdown rates but also by fees. If you are drawing down at, say, 5% pa, and paying fees of 2,5% pa (plus VAT) then you are effectively drawing down at almost 8% per year (fees of 2,5% pa is the Government’s estimate of the industry average, typically made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management).

If you can afford to draw down at 8% pa, incurring 2% pa less in fees simply means that you can pay those fee savings to yourself. In other words, you could draw down at 7% pa instead of 5% (translating into an instant 40 percent pay rise!) without accelerating the depletion of your savings.

To illustrate, assuming you draw down 5% from your R4,8 million pension pot, you will receive a pre-tax income of R240,000, or R20,000 per month. At the industry’s average fee rate of almost 3% pa you would also be paying costs of around R144,000 pa (R12,000 pm). In this scenario, you are paying yourself only two-thirds more than you are paying your service providers. Or, from another perspective, almost 40% of your total drawdown goes towards fees!

Moving to a low-cost provider, such as 10X Investments, which charges less than 1% pa in fees, you could instead draw R28,000 a month, and pay fees of only R4,000 pm. You are now receiving seven times more than your service providers, which seems a far more equitable split.

But drawing down at 8% per annum will deplete your savings quite quickly. Depending on your choice of portfolio, you risk a drop in lifestyle within 9 to 11 years. That is the time when you are likely to hit the regulatory drawdown limit of 17,5% pa, and your annual income may no longer keep pace with inflation. Eleven years is way too early for this to happen if you retire at age 60 or 65, with a statistical life expectancy of another 15 or 20 years.

The more prudent option in the above scenario would be to keep your income unchanged, and let the 2% pa cost savings compound within your living annuity. This can add between 5 and 15 years to the sustainability of your income (again, depending on your choice of portfolio and future market returns).

It is a fairly simple process to move your living annuity. It requires that you submit an application to your prospective annuity provider and give formal notice to the incumbent. The rest happens behind the scenes. If you are joining a low-cost provider there should be no initial fee and no compulsory advice fees or platform fees.

There are other good reasons besides costs to switch providers, such as bad service, poor planning tools, or inappropriate investment choices.

Note, however, that you will not be able to bypass regulatory drawdown limits by switching. Your original policy anniversary date will follow you to your new provider, and your annuity income and payment frequency will remain the same until the next policy anniversary date, when you can make changes. You will also not be allowed to split your living annuity between two or more providers.

While there is little you can do to increase your retirement pot once you have stopped working, there are ways to get more out of your savings, especially by keeping your living annuity fees low. For more information visit the 10X Living Annuity section, and make use of the retirement calculators.

The 10X Living Annuity does not charge for advice or administration and investors pay a maximum fee of 0.87% (including VAT), which reduces for amounts above R5m to as low as 0.40%. If you are in any doubt ask 10X to do a free, no-obligation cost comparison today: https://www.10x.co.za/campaign/fee-comparison

As the former Managing Director of Deutsche Bank in Johannesburg and London, Steven spent more than 10 years in equity research and corporate finance. He was consistently the top-rated Banks and Life Insurance analyst in South Africa, and was also voted best overall analyst in SA and EMEA (Emerging Europe, Middle East and Africa). During his time as Head of Research, the Deutsche Bank team was consistently rated no.1.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X assumes a total fee of 1% including VAT per annum and that the client comes directly to 10X (i.e. no advisor fee). This is the maximum investment fee charged by 10X.

The calculator assumes the you save 10% of the salary you input and that this grows annually in line with inflation.

The investment term and savings period is assumed to be from your current age to age 65, unless you are over 55. If you are over 55 the investment term is assumed to be 20 years.

Your projected investment value is shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections are based on the 10X High Equity portfolio, which is designed for investors with an investment term of 5 years and longer. The portfolio may be highly volatile over shorter periods.

The projections do not account for tax in any way.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X is assumed to charge a fee according to the 10X Living Annuity scale. The maximum fee in this scale is 0.86% including VAT per annum.

Your projected income and investment value are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected income in the first year will be equal to your desired income provided your annual income is between the regulatory limits of 2.5% and 17.5% of your investment value. Each year your projected income will keep pace with inflation, provided that it falls within these regulatory limits. The number of years that your projected income is able to keep pace with inflation without exceeding the regulatory cap of 17.5% is displayed on the outputs.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. These returns are based on the portfolio you selected (defaulted to 10X High Equity if your term exceeds 5 year). Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

Note that the 10X Living Annuity is underwritten by Guardrisk Life Limited (FSP No. 76).

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act. The 10X Living Annuity is underwritten by Guardrisk Life Limited (FSP No.76).

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X is assumed to charge a fee according to the 10X Investment fee scale and that the client comes directly to 10X (i.e. no advisor fee). The maximum fee charged by 10X in these scales is 1.04% including VAT per annum.

Your projected benefits are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected benefits are shown at age 65, unless you have changed the retirement age on the output page.

Where applicable, the projected monthly income assumes that you purchase an inflation-linked guaranteed annuity at retirement with your projected investment value. This estimate assumes that you use your entire projected investment value to purchase an annuity at retirement. Our estimate is based on the recent price of an inflation-linked guaranteed annuity without a spouse. An inflation-linked guaranteed annuity will provide you with an income that grows annually with inflation and pays you an income for the remainder of your life.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections above are based on the default investment strategy called the 10X default glide path, unless you changed the investment portfolio on the output page . The 10X default glide path automatically matches the investment portfolio’s asset allocation to your assumed retirement age. This ensures that when you are more than five years from retirement that you mainly own assets that are expected to deliver high returns - with expected higher volatility of returns - and that the portfolio will gradually be switched into less volatile assets - with expected lower returns - in the last five years before you retire, with the aim of preserving capital.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X assumes a total fee of 0.57% including VAT per annum and that the client comes directly to 10X (i.e. no advisor fee).

Your projected benefits are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

Your projected monthly income (if applicable), grows in line with inflation until your money is depleted.

The projections are based on the 10X High Equity portfolio, which is designed for investors with an investment term of 5 years and longer. The portfolio may be highly volatile over shorter periods.

The projections do not account for tax in any way.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.